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warned of the relevant risks in the private placement memorandum.
Christensen v. Commissioner, T.C. Memo. 2001-185; Robnett v.
Commissioner, T.C. Memo. 2001-17.
The private placement memorandum contained numerous warnings
regarding the tax risks involved with making an investment in
Arid Land. Although the parties stipulated that petitioners all
received a copy of the private placement memorandum, for the most
part petitioners could not recall having seen and/or having
reviewed the memorandum prior to making an investment. In any
case, the warnings were there and would have been evident if
petitioners had exercised reasonable care and read the
memorandum. After making their investments regardless of these
risks, petitioners claimed large losses despite the fact that
they had only recently invested cash in amounts far less than the
amounts of the losses:7 The Bronsons paid $7,700 and claimed a
loss of $17,369 (43.3 percent of their income); the Gordon-Wylies
paid $6,600 and claimed a loss of $14,888 (24.5 percent of their
income); and the Garritys paid $5,500 and claimed a loss of
7Petitioners argue that the instructions for Schedules K-1
provided by the Internal Revenue Service required them to report
the loss. The instructions state that the individual taxpayer
“must treat partnership items * * * consistent with the way the
partnership treated the items on its filed return.” The
instructions have further provisions dealing with errors on
Schedules K-1 as well as with the filing of statements to explain
inconsistencies between the partnership’s return and the
taxpayer’s return. We find to be unreasonable any belief by
petitioners or their return preparers that they were required by
law to mechanically deduct a loss which was improper.
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